The Next Shot in the Currency War

Stricken! Please spare a thought for your regular editor, Dan Denning, today. He’s gone down with an attack of the flu a week before Christmas. We’re hoping he’ll be back at headquarters tomorrow. In the meantime, the Daily Reckoning will battle on.

Speaking of battles, did the big guns at the front of the currency war just start to mobilise? Shinzo Abe is back in control of Japan. According to the news, he now has a mandate to print a lot of money.

The ‘new’ prime minister has made no secret of the fact that he wants the Bank of Japan to up the stakes in the currency war. The Bank of Japan has a 1% inflation target. Abe wants them to double it to 2%. Currency wars are about devaluation to encourage exports. The idea is to weaken the yen and kick-start Japan’s moribund economy. Although that’s been the plan for about 20 years now, to no avail.

But the currency markets took notice! On news of Abe’s election, the yen has dropped to the weakest level against the US dollar since 2001, according to Bloomberg. Following his victory, Abe grabbed the nearest mike on Monday and told the Bank of Japan that the people had spoken and they should look to fire up inflation when they meet on Wednesday to discuss policy.

No doubt Abe was quick to move because time is something Japanese Prime Ministers have been notoriously short of. This is Abe’s second crack at the helm, and he’s Japan’s fifth Prime Minister since 2007.

‘Mr Abe plans to empower an economic council to “spearhead” a shift in fiscal and monetary strategy, eviscerating the central bank’s independence,’ wrote Ambrose Evans-Pritchard in the Telegraph.

Japan is one to watch. When Currency Wars author Jim Rickards came to Sydney for a Port Phillip Publishing Strategy Session, he said the US would give Japan a ‘free pass’ – to a degree – in the currency war because Uncle Sam has geopolitical motives to help Japan beyond trade.

But how far will the BOJ be prepared (or allowed) to go? Will the Japanese once again be world innovators in unconventional monetary policy?

One place where Japan is undeniably losing the innovation lead is in the trade stakes. The big Japanese electronics companies are in the fight of their life. One reason is competition from neighbour South Korea.

But there’s another country that nobody’s watching which might be the next hot ‘emerging market‘ sometime in the future. The last thing the Japanese need is another South Korea on their doorstep. But they might just get it, and there’s nothing the Bank of Japan or Shinzo Abe can do about it. Your Weekend Daily Reckoning editor Nick Hubble explains on one of today’s other Daily Reckoning articles.

Callum Newman

Callum Newman is the editor of The Daily Reckoning and Associate Editor of Cycles, Trends and Forecasts. He also hosts The Daily Reckoning Podcast.
Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with.
Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.
To have Callum’s thoughts and insights on the current state of the currency, commodities and stock markets delivered straight to your inbox, take out a free subscription to The Daily Reckoning here.

An extract from “The Imperial Cruise” James Bradley “On March 12, 1873, LeGendre (the famed risk taking US-Civil War General) boarded a Japanese warship in Yokohama harbor. Legendre intended to take a Japanese diplomatic delegation to China, where the General would once again harangue his old adversaries about how somebody had better civilize Taiwan like the United States had civilized its Indians. As (US Admiral) Perry had arrived following the sun, now an American general would lead the Japanese westward. The Chinese had long viewed Japan as a young upstart – it was only two thousand years old, compared to… Read more »

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